Special Purpose Financial Statements

Publication Date :

13 Apr, 2025

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Table of Contents

What Are Special Purpose Financial Statements (SPFS)?

Special purpose financial statements (SPFS) are a type of financial reporting system created for a limited set of users, such as charity firms and some profitable entities. These statements are specifically prepared for certain stakeholders, such as owners and directors holding specific interests in the organization.

The most common application of SPFS is within for-profit private sector entities in Australia. Although SPFS has existed for years, the Australian Accounting Standards Board has made many amendments to its framework. Since then, it has helped communicate key financial figures like cash flows, profit and loss, and balance sheet items (assets and liabilities) to vital stakeholders.

Key Takeaways

Special purpose financial statements are a method of financial reporting developed specifically for a limited group of stakeholders, such as special-purpose entities.
Earlier, the Australian Accounting Standards Board (AASB) enacted the purpose of developing SPFS for entities working for specific purposes and for-profit private entities.
Later on, in 2021, the board suggested that for-profit entities must report as per GPFS.
SPFS has to follow six accounting principles mentioned in the AASB. It includes AASB 101, AASB 107, AASB 108, AASB 124, AASB 1048, and AASB 1054.
This reporting system is cost-effective and easy to prepare. However, it raises transparency issues among other stakeholders.

Special Purpose Financial Statements Explained

Special purpose financial statements accounting standards are financial standards established by AASB for special purpose entities (SPE) or limited groups of users. It includes entities not subject to legislation (smaller private companies and not-for-profit organizations), entities with references to AAS (Australian Accounting Standards), and entities registered with ACNC (Australian Charities and Not-for-profits Commission). Likewise, other entities within the scope of AASB 1057 (public and private companies and registered schemes funds) also fall under this category.

The standards require these entities to prepare financial statements intended for a particular user group. This group includes regulators, banks, landlords, family members, investors, consumers, and other pertinent stakeholders. With limited stakeholders' access, less financial information is disclosed. This creates minimal transparency compared to GAAP and GPFS (General purpose financial statements). Moreover, it is more cost-effective for the entities that intend to prepare these financial statements.

Under special purpose financial statements accounting standards, there are certain standards to be followed. It includes the following;

AASB 101 - Presentation of Financial Statements.
AASB 107 - Statement of Cash Flows.
AASB 108 - Accounting Policies, Errors, and Changes in Accounting Estimates.
AASB 124 - Related Party Disclosures.
AASB 1048 - Interpretation of Standards.
AASB 1054 - Australian Additional Disclosures.

In addition, various special purpose financial statement requirements must be followed. For instance, when firms switch from GPFS to SPFS, it is necessary to give clear and comprehensive explanations while doing the same. Also, it is essential to disclose material accounting policies with an explanatory note as per the special purpose financial statements requirements. It also applies to any changes made by firms in material accounting policies (like nature, reason for change, and impact on financial statement). Likewise, any inconsistencies must be disclosed, and enough efforts must be made to maintain consistency in accounting statements. However, since July 2021, for-profit entities have been required to follow GPFS due to the removal of special purpose financial statements.

Examples

Let us look at some examples to understand the concept better:

Example #1

Suppose Kevin owns a retail organization that operates various supermarkets in the city. For nearly a decade, they have followed GPFS, but with the growing complexity of operations, Kevin feels the need to switch to SPFS for more tailored accounting. He provides valid reasons for choosing SPFS over GPFS.

The organization handles certain inventory treatments that do not fully align with the Australian Accounting Standards Board, so they include relevant disclosures for transparency. With this standard, Kevin finds it easier to communicate financial information to board members and stakeholders, including banks, while also benefiting from reduced costs compared to GPFS.

Example #2

According to news published in July 2024, the Australian Charities and Not-for-profits Commission (ACNC) reported that nearly a third of large charities (among 250 medium and large charities) have misreported executive pay under new transparency rules. Another significant error involved entities wrongly selecting the financial standards, where most charities reporting through SPFS deployed GPFS. A few years back, in 2021, the removal of special purpose financial statements reduced the scope for many entities to follow this standard.

Advantages And Disadvantages

Following are some of the benefits and disadvantages of deploying SPFS in charitable and special-purpose entities. Let us look at the below table to understand better:

Advantages	Disadvantages
SPFS reduces the financial burden associated with financial reporting standards.	SPFS targets only a specific group of users, making them less suitable for large audience groups and also when decisions are made.
It is cost-effective and easier to prepare than GPFS.	Improper disclosures can cause misinterpretations among the stakeholders.
It has a streamlined approach that makes the reporting process quite efficient and simplified.	While there is enough transparency created through disclosures, it limits other users from accessing the information.
This accounting standard is specifically tailored for a few stakeholders. It is highly customizable.	There can be issues when adhering to regulatory compliances.
Due to proper disclosures, a good amount of transparency is maintained.

Special Purpose Vs. General Purpose Financial Statements

Let's examine the differences between SPFS and general-purpose financial statements (GPFS) in the context of reporting standards.

Basis	SPFS	GPFS
1. Meaning	An accounting standard developed especially for special-purpose entities like charitable trusts.	GPFS is an method of proeparing financial sttaments as per Australian Accounting Standards Board (AASB).
2. Prepared for?	It targets a specific or limited group of users, like SPEs that work with a purpose.	These statements are prepared for a wide range of users, like investors, creditors, and regulatory authorities.
3. Accounting standards	They have to follow six accounting principles like AASB 101, 107, 108, 124, 1048, and 1054.	Entities must follow all rules and principles as mentioned in the AASB.
4. Disclosure	There is limited financial information disclosed, leading to less transparency and accountability.	There is high transparency visible as more information is supplied to stakeholders.